LALIT M NEPANI HUF ,MUMBAI vs. INCOME TAX OFFICER WARD 4(1)(1), MUMBAI

PER SHRI ANIKESH BANERJEE, JUDICIAL MEMBER: The instant appeal of the assessee filed against the order of the NFAC, Delhi [for brevity “Ld. CIT(A)”] order passed under Section 250 of the Income Tax Act, 1961 (for brevity ‘the Act’), for Assessment Year 2010-11, date of order 26.09.2025. The impugned order emanated from the order of the Ld. Income 1 Tax Officer-Ward 32(2)(1), Mumbai (for brevity ‘Ld. AO’) order passed under Section 143(3) r.w.s. 147 of the Act, date of order 31.03.2016. 2. Brief facts of the case are that the assesse filed the return by declaring total income Rs.3.98,576/-. the return was process u/sec. 143(1) of the Act. Subsequently, the information received by the department from the Directorate of Income Tax (Intelligence of Criminal Wing) Mumbai and investigation Unit regarding a larger Scale misused of the Client Code Modification (CCM) facility by certain brokers in the derivatives (F&O) segments of the stock exchange. The information suggested that the certain beneficiaries including the present assessee has obtain the accommodation entries in form of artificial profit/loss through such CCM activities. The assessee claimed that the assessee had filed a revised return on 09.10.2012 and declared the income amount of Rs.61,29,938/- in the revised computation. The assessee contended that without considering the revised return the Ld. AO initiated the reassessment proceeding u/sec. 147 of the Act. Finally, the assessment was completed u/sec. 143(3) r.w.s. 147 of the Act with addition amount to Rs.81,96,318/- u/sec. 68 and consequently, the addition made towards the alleged commission for obtaining the accommodation entry at the rate of 2% on the bogus accommodation entries which comes amount to Rs.1,63,930/- u/sec. 69 of the Act. The aggrieved assessee filed an appeal before the Ld. CIT(A). the Ld. CIT(A) uphold the impugned assessment order. Being aggrieved assessee filed an appeal before the us. 3. The Ld. AR argued and filed a paper book comprising pages 1 to 81 which has been placed on record. The Ld. AR contended that the assessee submitted the additional ground by challenging the jurisdiction of Ld. AO for issuance of notice u/sec. 148 without considering the revised return filed by the assessee.

The revised return along with computation are duly annexed in the appeal memo. The Ld. AR contended that the assesse is not involved in Client Code Modification but the assessee had declared Rs.61,29,938/- as the total income including banking interest Rs.2,119/- in the revised return filed on 09.01.2012. He further contended that the Ld. CIT(A) has adjudicated the issue and has made the following observations which are contended in the relevant paragraph as below:

6.3.2 On the merits -addition under section 68 (Rs. 81,96,318/-). The legal matrix is well settled, where the Department reasonably challenges the genuineness of credits, the assessee must satisfactorily explain the nature and source of the receipts and demonstrate genuineness. Documentary production of contract notes and ledger entries is relevant but not necessarily decisive if surrounding circumstances raise serious and objective doubt. In the present case three inter-locking strands of evidence point away from genuineness:  An admission recorded in the statement of a responsible officer of the broker that accommodation profits were provided and commission charged;  Exchange/contract-note data analysis showing systematic and abnormal client-code modifications concentrated in a short window with both buy and sell legs modified and many trades showing implausible order-time/trade-time patterns, and  The investigative wing's report and date-wise extracts revealing very high value modifications on specific dates. 6.4. These features, when taken together, form a coherent and corroborative body of adverse material. The assessee's documentary evidence while prima facie supportive of trading activity does not satisfactorily explain these abnormal features there is no contemporaneous counter-party confirmation, no convincing explanation for post-market-hour executions, and no reliable documentary proof that the alleged pattern arose from legitimate market activity rather than orchestrated modifications. Ledger tallies between the assessee and the broker, or the mere presence of contract notes in the books, cannot by themselves dispel a sustained evidentiary inference of accommodation where objective patterns and a third-party admission exist. It can be fairly said that the assessee's transactions have no commercial purpose apart from the avoidance of tax liability and are sham transactions which suggest a collusive. manipulative rigged action by persons acting in concert to evade and avoid taxes. The appellant did not show anything that it has placed orders for purchase of the securities before the broker, necessary deposit of margin was made, the rates at which assessee placed in order, the rates at which the necessary sales were purchased and thereafter loss to the appellant. The appellant has not produced any denials. None of the evidences placed by the assassee have been rebutted by the appellant at the time of assessment. The inquiries have been made by the Department with various stock exchanges including NSEL/NSE which reveals that there has been a misuse of client code modification. 6.5. On the commission addition under section 69C (Rs. 1,63,930/-). The AO treated 2% of the alleged accommodation entries as commission and brought that sum to tax u/s 69C of the IT Act, 1961 on the footing of the broker's recorded admission. The assessee denies payment of any commission but has not produced contemporaneous documentary proof (for example, payment vouchers, bank debits, cancelled cheques evidencing payment or a denial by the broker in writing) to rebut the direct assertion recorded in the broker's statement. Where an admission by a responsible officer is supported by the transaction pattern and investigative findings, it constitutes credible material. In the absence of any positive contemporaneous evidence from the assessee disproving the commission claim, the AO's treatment of Rs.1,63,930/- as unexplained expenditure/income attractable u/s 69C of the IT Act, 1961is justified and is accordingly sustained.” 4. The Ld. AR further contended that alleged issue is no more res integra. The identical issue is duly adjudicated in favour of the assessee by the Coordinate Bench of ITAT Mumbai ‘D’ Bench in case of DCIT vs M/s. Comet Investments Pvt. Ltd. ITA No.5689 and 5802/Mum/2017, date of pronouncement 13.05.2019. The observations of the Bench contended in relevant paragraph are reproduced as below:-

“7. After having heard the counsels for both the parties at length and after having gone through the facts of the present case, we find from the records that the assessee is not a registered broker on the Stock Exchange. Only the registered brokers can modify Client code (CCM) of their own clients. Therefore, in such circumstances, the allegations of assessee having done or restored to CCM is apparently not correct. The AO has not brought on record that even the instructions for CCM was ever given by the assessee. Hence, in these circumstances, the assessee can't be held responsible for CCM if any done at the end of the broker. The AO except for the fact of receiving information from the DIT (1 & CI), has not considered the other aspects of the transaction to be considered as the transactions of the assessee. The other relevant aspect i.e. receipt and/or payments of monies, the time gap between the actual transactions on the stock exchange and the modification of the client code numbers of such transactions by the office of the registered share and stock broker, non-prohibition of client code modification by either the stock exchange or SEBI. In the order of assessment, the AO has stated the complete details of the Modus Operandi of creation of fictitious profit and/or losses with a malafide intention of escaping taxes. However, the AO has neither proved nor lead any evidence in case of any single transaction, which he has added to the income of the assessee, being of the type whose Modus Operandi is similar to the nature where he alleges to be added to the income of the assessee. 8. It is common knowledge that any transaction either relating to shares or derivatives to be considered as completed and taxable/deductible in the hands of any assessee should compulsorily have the following ingredients i.e. :- i) A valid transaction must have been executed on the Stock Exchange. ii) The customer of the registered share broker should confirm & agree that the transaction entered into by the broker belongs to him. iii) The payment Ibr purchases and/or receipt of sale proceeds should have happened between the Bank Accounts of the broker & his customer. iv) The above transaction must have been accounted for in the hooks of account of the registered broker as well as his customer. v) The eventual profit/loss on the transactions executed on the Stock Exchange & exchange of monies having happened as well as getting accounted in the respective books of account would eventually result into taxable profit and/or loss in the hands of such customers of the registered broker. 9. Whereas, the AO in the present case has mechanically added amounts as income of assessee without verifying & furnishing evidences on record that all the above steps have actually happened in the case of all the transactions which he has added as assessee's income. In our view, by no stretch of imagination can any AO consider a transaction on the Stock Exchange as income of a person other than the one who has either actually received monies in his bank account (in case of profit) and/or paid any monies from his bank account (in case of losses). 10. For the above proposition, we rely upon the decision in the case of M/s. Sambhavanath Investment v. ACIT ITA. No.3109/Mum/2011 AY 2006-2007 dated 19/12/2013 (Mum.)(Trib), ACIT v Kunvarji Finance (P) Ltd (2015) 61 Taxmann.com 52(Ahd.)(Trib.) wherein it was held that CCM within 1% is absolutely normal. Accordingly the addition was deleted. In the facts of the present case also, CCM is within 1%, ITO vs. Pat Commodity Services P. Ltd. ITA Nos. 3498 and 3499/Mum/2012 dt. 7th Aug, 2015 (Mum.) (Trib.), DCIT v Sunil J Anandpara ITA No. 3132/MUM/2015 Assessment Year: 2010-11 Bench 1 dated 15/9/2017 (Mum.) (Trib.) and ITO vs. M/s. M.N. Shares & Stock Brokers Pvt. Ltd. IT No. 5399/M/2017, ΑΝ. 2009-10 Bench - SMC. 11. Even nothing has been placed on record by the AO to demonstrate that any proceedings were ever initiated against the assessee by the SEBI or any stock exchange. It was also clarified by the Ld. AR that the broker, through whom the assessee carried on share transactions, were also not imposed any penalty. No co-relation between the assessee on the one hand and the other parties on the other hand has been brought on record to co-relate that the parties to whom the alleged profits or loss is supposed to have been diverted to reduce the taxable income of the assessee, has been brought on record to show that there was any collusion with each other and were known to each, so that one party diverted its profit or loss to the other parties. Even nothing has been brought on record to suggest that the said losses were purchased and the party were given cheque or cash payment in view of such favours According to us, such co-relation was necessary to fasten any liability upon the assessee. 12. No new facts or contrary judgments have been brought on record before us in order to controvert or rebut the findings so recorded by Ld. CIT. Therefore, there are no reasons for us to interfere into or deviate from the findings so recorded by the Ld. CIT. Hence, we are of the considered view that the findings so recorded by the Ld. CIT are judicious and are well reasoned. Resultantly, these grounds raised by the assessee stands dismissed.” 5. The Ld. DR relied upon the orders of the revenue authorities. However, the Ld. DR was unable to point out any distinguishing facts or place on record any contrary judicial precedent to distinguish the decision relied upon by the Ld. AR. 6. We have heard the rival submissions and carefully considered the material available on record. The assessee originally filed its return of income on 12.10.2010. Subsequently, a revised return was filed on 09.01.2012, declaring a total income of Rs.61,29,938/- along with bank interest of Rs.2,119/-, aggregating to Rs.61,32,057/-. The principal contention of the Ld. AR was that the Ld. AO initiated reassessment proceedings under Section 147 of the Act and issued notice under Section 148 without taking into consideration the revised return filed by the assessee. On this basis, the assessee also raised an additional ground challenging the validity of the reassessment proceedings. On the merits of the additions, we find that the revenue has treated the assessee as a beneficiary of alleged Client Code Modification (CCM) transactions and made additions under Sections 68 and 69 of the Act. However, the issue is no longer res integra. The Coordinate Bench of 6 the ITAT, Mumbai, in M/s. Comet Investments Pvt. Ltd (supra) has categorically held that, in the absence of cogent material establishing the assessee's involvement in the alleged CCM arrangement, additions cannot be sustained merely on the basis of information received from the Investigation Wing. The Tribunal further held that unless there is evidence to establish the assessee's participation in the alleged manipulation, together with corroborative material demonstrating that the impugned transactions were sham or collusive, no addition can be made. In the present case, except for the information received from the Investigation Wing, the revenue has not brought any independent or corroborative evidence on record to establish that the assessee was a party to any fraudulent CCM activity. No material has been placed before us to demonstrate any collusion between the assessee and the broker or any other beneficiary, nor has any evidence been brought on record to show that the impugned transactions were fictitious or that the assessee received any accommodation entries. Significantly, the Ld. DR was also unable to distinguish the decision of the Coordinate Bench relied upon by the Ld. AR or cite any contrary judicial precedent. Respectfully following the decision of the Coordinate Bench in M/s. Comet Investments Pvt. Ltd. (supra), we hold that the addition of Rs.81,96,318/- made under Section 68 of the Act and the consequential addition of Rs.1,63,930/- towards alleged commission under Section 69C of the Act are unsustainable in law. Accordingly, both the additions are directed to be deleted and the impugned order of the Ld. CIT(A) is set aside. Since the appeal has been allowed on merits, the legal ground as well as the additional ground challenging the validity of the reassessment proceedings have become academic in nature. Accordingly, the same are left open without any adjudication.